The clash over content delivery

Who would have thought that something as silly as a sputtering, animated frog could become a top-selling ring tone and wallpaper image throughout the world and prompt the release of a top 40 song?

That's exactly what happened to Jamster's ringtone Crazy Frog, whose popularity in Europe spawned the hit song "Axel F," which reached No. 1 on the U.K. singles charts. The ring tone has been marketed widely not by a particular mobile operator but by Jamster itself, which advertises the ring tone on instant messaging windows, Internet sites and TV advertisements.

Mobile content developers in the United States, meanwhile, are following their counterparts in Europe as they look for ways to market their ring tones, wallpapers, songs and even TV shows directly to customers.

Currently most of the mobile content downloaded to phones in the U.S. comes from a mobile operator's own portal. Carriers such as Verizon Wireless, Cingular and Sprint Nextel strike deals with individual content providers and list the offerings in a nice easy-to-use menu that appears right on the cell phone's screen. Wireless subscribers search the menu and purchase the content they want. Customers are then billed directly through the carrier's existing billing system.

But a growing movement is afoot among content providers to market their content directly to consumers so that they can buy ring tones, music and other digital content from the providers' own mobile portals instead of going through the carrier's portal. Because content providers typically pay anywhere from 25 percent to 30 percent of the revenue generated through the carrier portal to the operator, some of them are thinking of ways to bypass carriers altogether. The trend has already begun in Europe. News Corp., for example, is marketing mobile content from two of its print titles--The Times (London edition) and The Sun.

"There's a battle brewing," said Albert Lin, an analyst with American Technologies Research. "Content owners are starting to want direct access to their customers without having to pay an intermediary. But the carriers feel they have to be the intermediary because that's a huge source of profit for them. They also are afraid that direct access to content could spawn higher churn, and they want to control the quality of the user experience."

Mobile operators in the U.S. have spent billions of dollars over the past few years building new 3G wireless networks to handle emerging data services. And as the networks are being completed, they are faced with the challenge of filling these fat pipes. By owning the portal, they are strapped with the responsibility and cost of marketing the new services and the content that they offer. Direct marketing from content providers could help them fill the pipes faster.

There are roughly 180 million cell phone subscribers in the U.S. today, but only about 74 million currently buy content for their phones, according to Bango, a company that helps mobile brands get paid for content they market directly to consumers. The remaining 106 million mobile consumers who are only using their phone's voice services could turn into data customers down the road.

Expanding a brand
This is a highly coveted market because on average people who subscribe to data services typically outspend voice-only subscribers by about $6 per month. And some users who become regular content grazers will often spend up to $20 per month on content they've downloaded onto their phones, according to Bango.

"There's a battle brewing. Content owners are starting to want direct access to their customers without having to pay an intermediary."

--Albert Lin, analyst, American Technologies Research

Key brands in the U.K., such as Channel 4 New Media, the creator of the successful British reality show "Big Brother," have already seen great success. The TV channel launched a mobile portal back in May to coincide with the launch of Big Brother 6.

The site combined the best elements of the official "Big Brother" Web site, plus exclusive Big Brother content. It got viewers to log onto the site by showing short SMS text codes at the end of every show. Once on the site, fans could read news stories, information and gossip on the housemates, view live video clips and download ring tones and games around the "Big Brother" brand.

Channel 4's mobile Web site was developed by a company called Volantis, which also hosts the portal. Using the Volantis technology, the portal could recognize more 1,300 different mobile devices to generate content specifically formatted for each device.

It's easy to see how brands in the U.S. could also benefit from direct marketing. MTV and its sister channels, such as Comedy Central, have already started offering some of their content directly to consumers on their regular Web sites.

Some carriers, such as Cingular, have already started opening their networks. Content providers advertise short codes in newspapers, on Internet sites or on TV that subscribers use to download the content directly from the content wireless sites.

But some want to avoid problems that have arisen from direct marketing campaigns, such as Jamster's Crazy Frog, which has stirred quite a bit of controversy. Earlier this year the Advertising Standards Authority in the U.K. received complaints from viewers who not only objected to the frog's visible genitalia in the advertisements, but also the frequency of the television spots. Consumers have also complained that Jamster's advertisements are misleading and lure consumers into paying subscription fees for what have been advertised as "free ringtones."

A class-action lawsuit was filed earlier this year in California against Jamster alleging the company conducted fraudulent and deceptive advertising practices. The suit also names VeriSign, which owns Jamster, as well as carriers T-Mobile, AT&T Wireless (now a part of Cingular Wireless), and Cingular for allowing direct billing of the ringtone service, absorbing some of the profits, and charging their standard text messaging fees even though the messages were unwanted.

But some carriers are much more hesitant to give up control of their network. They're afraid that mobile Web surfers could inadvertently download worms or viruses that could wreak havoc on the network. They also don't want poor-quality mobile Web sites ruining the experience for their customers.

Currently, Verizon Wireless does not allow subscribers to access content that is not on its portal, although it is considering opening the door to its walled garden a crack.

"More recently, we have begun the process of looking at content providers who want to offer services directly to customers."

--Jeffrey Nelson, spokesman, Verizon Wireless

Unlike Cingular, which allows its subscribers to go to any WAP-enabled site, Verizon doesn't plan on giving consumers free reign to surf for mobile content in the way they are accustomed to doing on the Net. Instead it will allow access only to content it has certified.

"We protect the network at all costs," said Jeffery Nelson, a spokesman for Verizon Wireless. "What that has meant in the recent past is customers could only buy content that we allowed up on our different menus. More recently, we have begun the process of looking at content providers who want to offer services directly to customers. But we will require them to abide by some really important guidelines."

This means that content providers will have to ensure that they have the rights to distribute the content they're delivering. The carrier also will only allow access to content it deems appropriate for all ages. And it will ensure that the sites that can be accessed are free of viruses and worms so they don't infect mobile devices. If any of these conditions are violated, Verizon will simply pull the plug, Nelson said.

The billing hitch
Even if all mobile operators opened their networks, content providers would still have a difficult time cutting carriers out of the loop entirely. The biggest problem they face is billing. Without a relationship between the content provider and the carrier, consumers are forced to either enter credit card information on the mobile Web site or a regular Web site, or use a pay system like PayPal.

"It's not easy to create a separate billing system," said Lin. "The cell phone operators already own that, and they have the direct relationship with customers. Micro billing systems such as PayPal aren't that efficient when compared to direct monthly billing."

For now, carriers and content providers seem to be working together to strike a balance.

"We view the carriers as important partners," said Olivier Griot, director of mobile service for Hearst Magazines, which is currently developing a strategy to market its content direct to consumers. "The industry may evolve where customers don't access content through the carriers' portals, but we'll still need to integrate with their billing systems. As they continue to add great value to the relationship with customers, I'm happy to partner with them."

But many believe it's only a matter of time before the mobile Internet starts looking more like the traditional Internet. As new dual-mode cellular-to-Wi-Fi phones come on the market, people will be able to enter a Wi-Fi hotspot and download whatever they want directly from the Internet.

Today's mobile market could develop like the Internet service provider market did starting in the 1990s. Back then companies like America Online and Prodigy offered closed portals and search capabilities to their Internet access subscribers. But the development of the Web browser and a more sophisticated customer base changed the market drastically, diminishing the value of these portals.

"Mobile operators will eventually lose their grip on content, just like AOL did," said Ray Anderson, CEO of Bango, a U.K.-based company that helps content providers integrate into carriers' billing systems. "They're teaching people how to download ringtones and other content on their phones. But once they've laid the groundwork, content providers will be able to bypass the portals and interact directly with the brands."